HDFC Bank's Q3FY19 results (Outperformer) - In line and consistent

Q3FY19 results highlights

• PAT of Rs56bn grew 20% yoy (12% qoq) in line with consensus and strong. While NII, core fees and trading gains were strong, credit cost (both specific and contingent) rose sharply driven by higher agri slippage. The bank made a contingency provision of Rs3.3bn on agri loans which could slip 1QFY20 onwards due to announcement of new farm waivers recently. 
• Loans grew 24% yoy and 4% qoq with both retail and corporate growing strongly at 23% and 27%. Within retail, personal loans, credit cards, home loans and two wheelers grew faster than others. Proportion of unsecured loans increased further to 17.1% from 16.5% qoq. Growth in business banking at 19% yoy and 3% qoq continues to be lower than the normalized level as management is not comfortable with competitive pricing in LAP and there has been a conscious slowdown in lending to traders. Mgmt clarified that asset quality in SME loans has been stable over the last few quarters.
• Deposit growth remained strong at 22% yoy and 2% qoq. However the CASA ratio declined to 42% from 40.7% qoq due to run-off in current accounts and customers preferring fixed to savings deposits. Savings  deposits grew 14% yoy/ 0.3% qoq and current deposits grew 10% yoy but declined 3% qoq.
• NIM remained flat qoq. While CASA declined and cost of deposits increased, as an offset, yields also rose. Fees grew strongly at 27% yoy and 11% qoq. Payments business remains the key driver of fees, followed by increase in life insurance distribution which has grown after the bank adopted the open architecture, and growth in retail assets. Debit cards account for 7% of fees and credit cards 25%. Cost / income ratio at 39.9% declined from 38.4% qoq. Trading gains were high at Rs 4.7bn versus Rs -0.3bn qoq and Rs 2.6bn yoy.
• Slippage of Rs40bn was higher than Rs33bn qoq at 2.04% of loans. The increase was on account of agri slippages. Ex agri, slippage was lower at 1.7% (Rs33bn). GNPAs rose 8% qoq to 1.38%. Ex agri, GNPAs were at 1.1% and have remained stable yoy and qoq. Mgmt expects agri slippages to move up again in June due to new waivers announced. Due to higher slippage, specific credit cost remained high at 90bps growing 28% yoy and 10% qoq. In addition, the bank made contingency provision of Rs3.3bn on agri loans. Total credit cost of 1.2% was substantially higher than 1% qoq and yoy. Exposure to IL&FS is insignificant.  

Valuation and view

We maintain TP and reiterate Outperform given HDBK’s strong franchise, sound asset quality and consistently strong earnings growth.  Stock trades at 4.1x PBV FY20E.